You have probably been inundated with advertising for investment firms, ranging from bare-bones, online discount brokers to full service investment organizations. Which one of these formats is right for you? Let's consider the benefits and costs of both, starting with full service firms.
- Guidance/Advice – You will be assigned a financial advisor to help you outline your financial goals, set up your investments and manage them. They are readily available for advice.
- Access to Research – Full service firms have great access to in-depth information on companies, and can help you interpret that information to make sound investment decisions. Additionally, they will take the time to personally explain any of this material to you.
- Control – If you wish, your advisor can make investment decisions on your behalf. For those who understand the importance of investing but are disinterested in the process, this provides an advantage.
- Commissions – While advisors are overwhelmingly competent and act in your best interests, they are still essentially salespeople, and generate money for their brokerage through trades. If you do not understand or disagree with a recommended trade, ask for details. It is also important to have the firm's commission and fee structure clearly explained.
- Minimum Account – Full-service brokerages will require a minimum account size, generally around $5,000-$10,000.
- Potential Bias – There may be financial incentives for full-service firms to steer you toward various investments. That does not mean they are not right for you, but do not hesitate to question any investment advice if you do not understand it or agree with it.
Here are similar benefit and cost comparisons for online-only investment firms:
- Lower Costs – While you pay trading fees at online brokers, there are generally little or no sales commissions, so your overall costs are lower.
- Access to Research – Since online brokers expect you to perform your own research and make your own investment decisions, it is in their best interest to provide substantial investment research material that is easy to access online. What you won't get is the personal touch of a dedicated financial advisor distilling or explaining this material to you.
- Unbiased Information – Online investment firms have no reason to steer you in any particular direction, or to steer you at all. You do not have to read between the lines when researching investments.
- No Guidance – Access to the best investment resources does you no good if you lack the skills to process them (or worse, if you think you possess the skills but your results say otherwise). If you need the advice of a full service firm, it is better to pay for it than to fritter away your investment money with experimentation.
- Hidden fees – Costs are generally handled on a per-trade basis, but there may be hidden fees for simple tasks that would be covered by a full service firm. Make sure you understand all fees before proceeding. Any reputable online investment firm should be able to summarize them for you.
- Minimal Customer Service – Online firms vary in their customer service, should something go wrong in the execution of a trade, or you have questions about their process that cannot be answered online. Do some research on the customer service ratings of any broker before you choose them as your investment source. You can check out any investment group through FINRA (the Financial Industry Regulatory Authority).
In general, online-only investment firms are for those who know what they want, know how access online research and facilitate a trade, and can both understand and navigate fees. On the other hand, full-service investment firms are for those who need or prefer advice on investment management and long-term planning to meet financial goals, can handle the extra expense, and believe that it is worth the advice.
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